Seriously, who comes to mind when you think of a wealthy person?
The Walton heirs?
Steve Jobs family?
Take a minute to scroll through the Forbes 400 list that you can see by clicking here.
Is there anyone on the list that got rich by earning 10% on their investment account?
Sure, the often quoted Warren Buffet is known for being a famous investor. He’s right near the very top of the wealthiest Americans. But, in reality, Warren Buffett got wealthy by taking ownership in undervalued or underutilized companies in which believed he could significantly increase their bottom line by using his remarkable skills.
All of the people on the Forbes 400 list became wealthy because they made money utilizing their skills through a company in some way, or they inherited money from someone who did.
The nugget of gold here is to maximize your skills to create wealth.
Is this to say that you shouldn’t pay attention to your investments? Of course I am not saying that investing well isn’t important! If these wealthy individuals had not managed their money well, they wouldn’t still be wealthy. They could even be like the huge majority of lottery winners who lose their fortunes.
The key to wealth is to both first optimize your income, and then to also invest smartly.
Now, if you’re already wealthy, then you can become wealthy from earning 10% a year on your investments. For example, 10% of $10,000,000 is $1,000,000, or the amount that you would earn if you invested your wealth and made 10% a year.
That’s a pretty nice sum, but keep in mind that for you to accumulate wealth from the $1,000,000 investment earnings every year, you would have to “save” it, or put it to work for you, which is what investing really is.
When someone reaches $10,000,000 net worth, it’s not easy to save everything that’s made on their investment account unless they have significant income. (Ever noticed how spending increases with income? It’s my analogy of the road trip evolving to flying for transportation, then flying in coach evolving to flying first class, then flying first class evolving to flying on a private jet. I wrote about this paradigm in my book, Earn, Grow, Give.)
Let’s go back to wealth creation, and play with some numbers. If your invested net worth is $500,000, and you earn 10% a year on your investments, you’ll make $50,000 a year from those investments. (We’re using 10% because it’s easy. Keep reading….)
And if your investment account has $100,000, you’ll earn $10,000 with a 10% return each year. Ouch; that’s going to take a while to create a big nest egg for retirement, let alone live the way you want along the way, especially after taxes and inflation.
Plus, when was the last time that you earned 10% on a well-diversified investment account? As you probably know already, the 10% return number is extremely optimistic, if not downright unrealistic for an intermediate to long term buy and hold diversified investment account.
Now, I detest negativity, so please don’t accuse me of being negative. (In fact, I might get some outright nasty comments or emails from this post.)
But, I welcome reality completely, as tough as it sometimes can be. Here’s why: Reality allows us to see what is, and make changes for the better based on that reality.
The reality is, however, as mentioned above, you don’t get wealthy from earning 10% on your investment account unless you’re already quite wealthy.
Let’s look at the other side of the wealth equation based on what we saw with the above numbers coupled with the insights from looking at the wealthy people in the Forbes 400: the income side.
What if you’re making $100,000 a year, and you can increase that income by 10% the first year?
You’d be making another $10,000 a year, plus you could add that to what you already have in your wealth account after buying yourself a nice little reward for your efforts.
Then, what if the next year, you increase your earnings by 15% because you’ve gotten even better at what you do to make more money?
And what if this continues? Is there any chance that you would be enjoying your life more if you were making additional money, while also tapping into your highest and best skills? My guess is that you would be happier. It goes without saying these days that being happy is really important.
Right now I can sort of hear you saying: “Get real, Camille. I am making the most money that I can”; “Are you kidding? I am lucky to have a job at all!” or, maybe it’s “who has time for improving skills”?
These thoughts allow us to stay in our comfort zones and our current mindset. But you may want to expand your mindset, your income and your net worth along with it.
Most of the people on that Forbes 400 list started from square one. They had an idea. They believed in their idea, and they acted on that idea with conviction. And thank goodness for that, because many of these people have given away millions of dollars to make the world a better place.
I “get” that it’s a little hard to resonate with the Forbes 400 folks. I’ll admit: it’s hard for me, too. So, think of the people in your community who are affluent. How did they become wealthy? Was it from investing their savings account well or from making money using their skills? It’s probably from using their skills if you think about it.
You may be thinking of someone who became wealthy in your community from real estate. Real estate investing can be a combination of investing and using your higher skills.
As a financial woman, a great question to ask yourself is this: How could I make more money, and become wealthier?
Increasing income happens by first believing it’s possible, which is why I like to start with helping others clear out the limiting messages and get a healthy money mindset. (Click here to get my process for doing this as a free gift.)
A good next step, then, is to make a list of ways that increasing income could possibly happen for you. Don’t think of how, just think of what’s possible.
Then the next step is to choose the most likely, lowest cost, fastest and easiest possibility on that list, and take focused action to make it happen.
The bottom line is that most people have in their mind that you get wealthy by scrimping and saving as much money as you can, and then by investing well so that one day you can enjoy all the money that you saved along the way. Again, investing is one very important step in the wealth equation, but the first, fastest, and more enlightening way is to first increase your income, and then also invest well.